The performance on an ex-ITC basis was even stronger at 15/23 per cent, respectively. Ebitda growth was driven by favourable base, soft commodity inflation, better pricing discipline, premiumisation and favourable operating leverage.

Interestingly, even during turbulent market conditions in the trailing 12 months, categories like personal care, home care, QSR and food & beverages grew at 9-10 per cent. But during Q3FY18, all categories except cigarettes grew in the mid to high teens.

Dabur, Marico and Emami’s international venture have significantly under-performed in the last 6-7 quarters primarily due to geo-political tensions in the MENA region, low crude oil prices and depreciation of currencies against the Indian rupee. In Q3FY18, Emami and Marico reported positive growth of 16 per cent and 1 per cent, respectively. But Dabur’s revenues contracted by 6 per cent.

The FMCG (fast-moving consumer goods) sector has posted its slowest revenue growth at 4 per cent CAGR in the last two years compared with 13 per cent CAGR in the last decade. The rural market has already had its share of challenges like deficient monsoon in FY15 and FY16 and low wage growth. It was further bruised with unprecedented events like demonetisation and the goods and services tax (GST) rollout. This led consumption growth dropping to its lowest in the last decade.

Most companies are witnessing green shoots in the rural market, and we expect that the government’s focus on improving rural incomes will boost the consumption demand. We believe companies with a higher exposure to rural markets can surprise on growth.

Over the last 10 years, FMCG companies have expanded gross margins by 350bps, while Ebitda margins expanded by 450bps. We anticipate further improvement in Ebitda margins by 150bps over FY17-20E, led by higher revenue growth, rising premiumisation, GST-driven efficiencies and cost optimisation initiatives.

Most trade channels (including wholesale and CSD) have begun to normalise after the shock of GST implementation. We believe the sector has significant scope of mean reversion (link) towards its 10-year revenue CAGR of 13 per cent against 7 per cent in nine months of FY18.